The Truth about Guarantor Loans

A guarantor loan is high interest loan guaranteed by someone other than the person applying for the loan. This person is the guarantor, and they are responsible for repaying the full loan amount in the event the borrower defaults. In most cases this means the guarantor will be a family member or close friend. If you’re considering a guarantor loan, or guaranteeing one yourself, here are some important things you need to know about what’s required, and how the process works.

Loan Applicants:

There is very little needed to apply for a guarantor loan other than someone to guarantee it. This is because these loans are designed to help people who are otherwise unable to get their own loan. Since someone else is guaranteeing the repayment, the actual applicant isn’t required to have full time employment, or any credit history. You just need to be at least 18 years of age, and have a UK bank account. This makes students, and even part-time workers eligible for guarantor loans.

The loan applicant will however be expected to make regular payments, as agreed, and to satisfy any documentation or personal proofs required by the lender to establish that the borrower is who they claim to be. In most cases, the same documents used to open a bank account are sufficient, though it’s always a good idea to bring more than one form of identification.

Unfortunately, too few loan applicants are experienced enough with finances to understand just what goes into a Guarantor Loan, or the real calculations behind it. For example, a monthly payment of £342 might not sound like much when considering purchasing a car for £7,500. However, at the standard 50% interest rate most Guarantor Loans charge, calculated over 5 years, a car purchase will end up costing more than £20,500. That’s almost three times the total amount borrowed. Because of this, borrowing less is always preferable to borrowing more.

Loan Guarantors:

A loan guarantor can be anyone 21 and older in the UK with good credit history, as long as they are not financially linked to the loan applicant. In other words, one spouse can’t be a loan guarantor for the other, but a family member or a close friend can. Bank statements, identification, and the standard processes for applying to a normal loan company are also required. In most cases the guarantor should own a home to secure payment in the event of a default, but this isn’t always the case. For loans of less than £1,000, many lenders are willing to approve funds based on the credit history of the guarantor, or other financial assets. Even so, the guarantor always has full responsibility for loan repayment in the event the applicant defaults.

This means that the loan guarantor will be required to cover the full loan amount, and any fees associated with late or missed payments. Late payments or defaults will negatively impact the credit of the guarantor, as these defaults will show up with the credit agencies. This can limit a guarantor’s ability to obtain future loans, mortgages, and in some cases, even mobile phones. While guarantor arrangements start out with the best of intentions, they don’t always end that way.

The biggest reason for this is that the person applying for the loan is either unable to make payments, as in the case of many students. Other times it can be someone who is unwilling to make payments, as can happen in failed personal relationships or broken friendships. When these things occur, the loan agency has the option of forcing a sale on collateral to settle the debt if the guarantor refuses to pay it. Obviously this can ruin a lifetime of careful financial planning and management on part of the guarantor, so it’s wise to take steps to avoid this. The best way to do that is by managing the loan payments. This can be done by setting up a secondary arrangement, where the loan holder pays the guarantor five days before the actual loan payment comes due, and then both parties make sure the payment is always in on time.

The Guarantor Loan Agency:

The loan agency will review both the applicant and the guarantor. In cases where the applicant has an existing credit history, loan interest rates will often be lowered, but otherwise, they are usually set at around 50% APR. This has to do with the risk these loan agencies take. While these interest rates are obviously much higher than a traditional High Street loan, they’re considerably less than a pawn loan or payday loan. Alternate loan types like these have relative APR percentages at least double that of a guarantor loan, and sometimes 10 to 100 times more, with significantly higher hidden costs.

Once the agency reviews the loan application and associated paperwork, they’ll consider the amount applied for, listed repayment methods, and any guarantees. In most cases, the loan amount will be between £1,000, and the maximum allowed under UK law, of £7,500. Repayment terms are typically from one to five years, though there are different standards for loan amounts under £1,000. Some lenders will loan as little as £50 at a time. There are associated late payment fees and charges that can also be applied if the loan agreement is not kept. In all cases, the guarantor of the loan bears final responsibility for this.

When You Should Consider a Guarantor Loan:

If you’re helping someone to build or rebuild their credit, then you’ll both want to be reasonable about it. That means making financially sound decisions, and borrowing a smaller amount, such as £1,000. You’re going to be risking a lifetime of fiscal responsibility for someone who either hasn’t yet demonstrated their ability to manage finances, or needs a second chance. If both the borrower and the guarantor are able to make sure the payments are made on time, then a Guarantor Loan is worth considering. For guarantors, making sure to keep credit protected, while helping a loved one or close friend build credit can be worth the risk. However, if a loan is being made to someone who’s not a close friend, it’s often better to just lend money from savings, rather than risk the added interest payments a loan guarantor will still be liable for.